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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended September 30, 2004 |
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Or |
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o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 000-30617
GlobalSCAPE, Inc.
(Exact name of registrant as specified in its charter)
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Delaware |
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74-2785449 |
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(State or
other jurisdiction of incorporation or |
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(I.R.S.
Employer Identification |
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6000 Northwest Parkway, Suite 100 |
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78249 |
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(Address of principal executive offices) |
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(Zip Code) |
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(210) 308-8267 |
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(Registrant’s telephone number, including area code) |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ý Yes o No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). o Yes ý No
GlobalSCAPE®, CuteFTP®, CuteSITE Builder®, PureCMS®, CuteZIP®, CuteHTML® and CuteMAP® are registered trademarks of GlobalSCAPE Texas, LP. GlobalSCAPE Secure FTP Server, GlobalSCAPE Transfer Engine, ContentXML and SnapEdit are trademarks of GlobalSCAPE Texas, LP. Other trademarks and tradenames in this quarterly report are the property of their respective owners.
ii
GlobalSCAPE, Inc.
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December 31, |
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September 30, |
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(unaudited) |
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Assets |
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Current assets: |
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Cash |
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$ |
342,433 |
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$ |
456,491 |
|
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Accounts receivable (net of allowance for doubtful accounts of $43,581 and $15,442 at December 31, 2003 and September 30, 2004, respectively) |
|
240,615 |
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176,163 |
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||
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Prepaid expenses |
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46,428 |
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91,687 |
|
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Total current assets |
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629,476 |
|
724,341 |
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Property and equipment: |
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Furniture and fixtures |
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332,920 |
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332,920 |
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Software |
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235,436 |
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240,572 |
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Equipment |
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590,019 |
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604,488 |
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Leasehold improvements |
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154,376 |
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167,762 |
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||
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|
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1,312,751 |
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1,345,742 |
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Accumulated depreciation and amortization |
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1,035,830 |
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1,175,612 |
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Net property and equipment |
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267,921 |
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170,130 |
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||
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Other assets: |
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Other |
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11,881 |
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11,881 |
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Total other assets |
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11,881 |
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11,881 |
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Total assets |
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$ |
918,278 |
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$ |
906,352 |
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1
GlobalSCAPE, Inc.
Balance Sheets
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December 31, |
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September 30, |
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(unaudited) |
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Liabilities and Stockholders’ Equity |
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Current liabilities: |
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Accounts payable |
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$ |
180,555 |
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$ |
98,660 |
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Accrued expenses |
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173,935 |
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201,332 |
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Notes payable |
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100,000 |
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— |
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Deferred revenue |
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140,489 |
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169,438 |
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Current portion of capital lease obligation |
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15,294 |
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— |
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Total current liabilities |
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610,273 |
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469,430 |
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Long-term liabilities: |
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Other long-term liabilities |
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39,253 |
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30,842 |
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Total long-term liabilities |
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39,253 |
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30,842 |
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Commitments and contingencies |
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Stockholders’ equity: |
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Preferred stock, par value $0.001 per share, 10,000,000 authorized, no shares issued or outstanding |
|
— |
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— |
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Common stock, par value $0.001 per share, 40,000,000 shares authorized, 13,488,619 and 13,773,219 shares issued and outstanding at December 31, 2003 and September 30, 2004, respectively |
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13,489 |
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13,773 |
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Additional paid-in capital |
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671,893 |
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675,365 |
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Retained earnings (deficit) |
|
(416,630 |
) |
(283,058 |
) |
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Total stockholders’ equity |
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268,752 |
|
406,080 |
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Total liabilities and stockholders’ equity |
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$ |
918,278 |
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$ |
906,352 |
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See accompanying notes.
2
GlobalSCAPE, Inc.
(Unaudited)
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Three months ended September 30, |
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Nine months ended September 30, |
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2003 |
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2004 |
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2003 |
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2004 |
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Operating revenues: |
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Software product revenues |
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$ |
1,336,682 |
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$ |
1,270,223 |
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$ |
3,766,576 |
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$ |
3,730,158 |
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Operating expenses: |
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|
|
|
|
|
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Cost of revenues (exclusive of depreciation and amortization shown separately below) |
|
128,404 |
|
111,556 |
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401,745 |
|
304,071 |
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Selling, general and administrative expenses |
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790,200 |
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823,813 |
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2,804,617 |
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2,599,165 |
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Research and development expenses |
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226,567 |
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165,743 |
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647,659 |
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552,477 |
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Depreciation and amortization |
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106,511 |
|
33,769 |
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332,848 |
|
139,782 |
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Total operating expense |
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1,251,682 |
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1,134,881 |
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4,186,869 |
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3,595,495 |
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Income (loss) from operations |
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85,000 |
|
135,342 |
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(420,293 |
) |
134,663 |
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Other income (expense): |
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Interest expense |
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(1,016 |
) |
(371 |
) |
(3,071 |
) |
(1,091 |
) |
||||
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Loss on disposal of assets |
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— |
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— |
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(1,486 |
) |
— |
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||||
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Total other income (expense) |
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(1,016 |
) |
(371 |
) |
(4,557 |
) |
(1,091 |
) |
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Income (loss) before income taxes |
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83,984 |
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134,971 |
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(424,850 |
) |
133,572 |
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Income tax expense (benefit): |
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|
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Current: |
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|
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|
|
|
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||||
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Federal |
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— |
|
— |
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— |
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— |
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||||
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State |
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1,400 |
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— |
|
1,400 |
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— |
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||||
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Deferred: |
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|
|
|
|
|
|
||||
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Federal |
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— |
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— |
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— |
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— |
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||||
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State |
|
— |
|
— |
|
— |
|
— |
|
||||
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Total income tax provision (benefit) |
|
1,400 |
|
— |
|
1,400 |
|
— |
|
||||
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|
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|
|
|
|
|
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||||
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Net income (loss) |
|
$ |
82,584 |
|
$ |
134,971 |
|
$ |
(426,250 |
) |
$ |
133,572 |
|
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Net income (loss) per common share- basic |
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$ |
0.01 |
|
$ |
0.01 |
|
$ |
(0.03 |
) |
$ |
0.01 |
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Net income (loss) per common share- assuming dilution |
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$ |
0.01 |
|
$ |
0.01 |
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$ |
(0.03 |
) |
$ |
0.01 |
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Average shares outstanding: |
|
|
|
|
|
|
|
|
|
||||
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Basic |
|
13,358,619 |
|
13,773,219 |
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13,358,619 |
|
13,633,611 |
|
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Diluted |
|
14,275,592 |
|
14,303,786 |
|
13,358,619 |
|
14,164,178 |
|
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See accompanying notes.
3
GlobalSCAPE, Inc.
(Unaudited)
|
|
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Nine months ended September 30, |
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2003 |
|
2004 |
|
||
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Operating Activities: |
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|
|
|
|
||
|
Net income (loss) |
|
$ |
(426,250 |
) |
$ |
133,572 |
|
|
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
|
||
|
Bad debt expense |
|
9,277 |
|
(11,504 |
) |
||
|
Depreciation and amortization |
|
332,848 |
|
139,782 |
|
||
|
Loss on disposal of assets |
|
1,486 |
|
— |
|
||
|
Changes in operating assets and liabilities: |
|
|
|
|
|
||
|
Accounts receivable |
|
(38,628 |
) |
75,956 |
|
||
|
Prepaid expenses |
|
1,710 |
|
(45,259 |
) |
||
|
Accounts payable |
|
(40,786 |
) |
(81,895 |
) |
||
|
Accrued expenses |
|
125,931 |
|
27,397 |
|
||
|
Deferred revenues |
|
29,439 |
|
28,949 |
|
||
|
Other long-term liabilities |
|
(8,411 |
) |
(8,411 |
) |
||
|
Net cash provided (used) by operating activities |
|
(13,384 |
) |
258,587 |
|
||
|
Investing Activities: |
|
|
|
|
|
||
|
Purchase of property and equipment |
|
(47,543 |
) |
(32,991 |
) |
||
|
Net cash used in investing activities |
|
(47,543 |
) |
(32,991 |
) |
||
|
Financing Activities: |
|
|
|
|
|
||
|
Issuance of common stock |
|
— |
|
3,756 |
|
||
|
Bank borrowing (repayment) |
|
100,000 |
|
(100,000 |
) |
||
|
Principal payments on capital lease obligations |
|
(45,617 |
) |
(15,294 |
) |
||
|
Net cash provided (used in) financing activities |
|
54,383 |
|
(111,538 |
) |
||
|
Net increase (decrease) in cash |
|
(6,544 |
) |
114,058 |
|
||
|
Cash at beginning of period |
|
480,609 |
|
342,433 |
|
||
|
Cash at end of period |
|
$ |
474,065 |
|
$ |
456,491 |
|
See accompanying notes.
4
GlobalSCAPE, Inc.
GlobalSCAPE, Inc. (collectively referred to as “GlobalSCAPE” or “the Company”), founded in April 1996, develops and distributes Internet related software. The Company is best known for its popular file transfer program, CuteFTP. The Company derives its revenues primarily from sales of licenses to use its software products. Sales of CuteFTP and CuteFTP Pro accounted for approximately 75% and 70% of total revenues in 2003 and the first nine months of 2004 respectively. The Company is organized and operates as one segment and markets its products primarily through the Internet, additionally with an internal sales force and through resellers.
Corporate Structure
All of the Company’s operations are conducted by GlobalSCAPE Texas, LP, a Texas limited partnership. The partners of GlobalSCAPE Texas, LP are two Nevada limited liability companies, which are both wholly-owned subsidiaries of GlobalSCAPE, Inc., a Delaware corporation. GlobalSCAPE, Inc. is approximately 71% owned by the Brown and Mann-GlobalSCAPE Joint Venture, with the remainder held publicly. GlobalSCAPE, Inc. is a holding company and conducts no operations, however, the stock of GlobalSCAPE, Inc. is quoted on the OTC Bulletin Board. References to “GlobalSCAPE” or the “Company” refer collectively to all of these entities unless otherwise indicated.
The accompanying unaudited financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X, “Interim Financial Statements.” Accordingly, they do not include all information and footnotes required under generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normally recurring accruals) considered necessary for a fair presentation have been made. The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year.
The Balance Sheet at December 31, 2003 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the financial statements and footnotes included in GlobalSCAPE’s Annual Report on Form 10-K for the year ended December 31, 2003.
The consolidated financial statements include all subsidiaries. All inter-company transactions and balances have been eliminated.
Liquidity
The Company maintained its positive working capital position through the third quarter of 2004 through a combination of revenue growth and continued expense control. The Company incurred significant operating losses during the year ended December 31, 2003 and the quarter ended March 31, 2004 but returned to profitability for both the second and third quarters of 2004. In February 2004 GlobalSCAPE reduced its workforce by 20%, laying off 9 of the 45 people then employed by the Company. This workforce reduction was a necessary step in improving the overall financial health of the Company. GlobalSCAPE reduced total operating expenses by approximately $591,375 for the nine months ended September 30, 2004 over the same period in 2003, while sales declined $36,418 over the same periods.
The Company is highly dependent on the sale of two software products, CuteFTP and CuteFTP Pro, which may be subject to technological and competitive obsolescence. Revenues from these two products declined approximately 9% when comparing the first nine months of 2003 to the same period in
5
2004. However, the decline in revenues from the sale of these two products was offset by sales of newer products such as Secure FTP Server, FTP for Mac and Publish XML. Total revenues declined only 1% when comparing the first nine months of 2003 to 2004.
On March 30, 2004, the Company obtained a $200,000 line of credit with the Brown and Mann-GlobalSCAPE Joint Venture. The line of credit is available after June 21, 2004 if the Company fails to extend a line of credit with a bank and matures on December 31, 2004. The interest rate is subject to change and is indexed to the prime rate published in the Wall Street Journal. In connection with the line of credit, GlobalSCAPE entered into a Commercial Security Agreement with the Brown and Mann-GlobalSCAPE Joint Venture whereby GlobalSCAPE granted a security interest in all its accounts and equipment. The Company does not expect to extend this line of credit upon maturity.
The Company renewed a $250,000 revolving line of credit agreement with a commercial bank on August 12, 2004 which is due on demand, but if no demand is made, then on December 21, 2004. The interest rate is subject to change and is indexed to the Wall Street Journal prime rate. The initial rate is 6.00%. In connection with the line of credit, GlobalSCAPE entered into a Commercial Security Agreement with the bank whereby GlobalSCAPE granted a security interest in all its accounts receivable and equipment. The Company has not borrowed against the line of credit since the renewal. GlobalSCAPE expects to extend the line of credit with the bank when it matures in December 2004.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current year presentation. These reclassifications had no impact on operating income as previously reported.
During the first three quarters of 2004, the Company did not sell or dispose of any fixed assets.
Statement of Financial Accounting Standards 123, Accounting for Stock-Based Compensation (SFAS 123), encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans based on the fair market value of options granted. The Company chose to account for stock based compensation using the intrinsic value method prescribed in APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Accordingly, compensation expense is recorded to the extent that the current market price of the underlying stock exceeds the exercise price. In December 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard 148, Accounting for Stock Based Compensation - Transition and Disclosure (SFAS 148), which amends SFAS 123. SFAS 148 requires more prominent and frequent disclosures about the effects of stock-based compensation. The Company will continue to account for its stock-based compensation according to the provisions of APB Opinion No. 25.
Pro forma information regarding net income and earnings per share is required by Statement 148, which also requires that the information be determined as if the Company had accounted for its stock options granted subsequent to December 31, 1994 under the fair value method of that Statement. The fair value of these options was estimated at the date of grant using a Black-Scholes option-pricing model.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period. The Company’s pro forma information for the three and nine months ended September 30, 2003 and 2004 follows:
6
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Three months ended |
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Nine months ended |
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||||||||
|
|
|
2003 |
|
2004 |
|
2003 |
|
2004 |
|
||||
|
Net Income, as reported |
|
$ |
82,584 |
|
$ |
134,971 |
|
$ |
(426,250 |
) |
$ |
133,572 |
|
|
Stock-based compensation expense that would have been included in the determination of net income (loss) had the fair value based method been applied to all awards, net of related tax effects |
|
(8,634 |
) |
(3,554 |
) |
(39,114 |
) |
(15,729 |
) |
||||
|
Pro forma net income (loss) |
|
$ |
73,950 |
|
$ |
131,417 |
|
$ |
(465,364 |
) |
$ |
117,843 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Income (Loss) per share: |
|
|
|
|
|
|
|
|
|
||||
|
Basic- as reported |
|
$ |
0.01 |
|
$ |
0.01 |
|
$ |
(0.03 |
) |
$ |
0.01 |
|
|
Basic- pro forma |
|
$ |
0.01 |
|
$ |
0.01 |
|
$ |
(0.03 |
) |
$ |
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Diluted- as reported |
|
$ |
0.01 |
|
$ |
0.01 |
|
$ |
(0.03 |
) |
$ |
0.01 |
|
|
Diluted- pro forma |
|
$ |
0.01 |
|
$ |
0.01 |
|
$ |
(0.03 |
) |
$ |
0.01 |
|
During the third quarter ended September 30, 2004, 105,000 options were granted to various employees at an average exercise price of $0.1225 per share. There were no options exercised by employees during the third quarter of 2004. Additionally, 45,000 stock options were forfeited in the third quarter 2004.
Basic and diluted net income per common share is presented in conformity with Statement of Financial Accounting Standards No. 128, “Earnings Per Share” (SFAS 128) for all periods presented. Basic earnings per share is based on the weighted effect of all common shares issued and outstanding, and is calculated by dividing net income (loss) available to common stockholders by the weighted average shares outstanding during the period. Diluted earnings per share is calculated by dividing net income (loss) available to common stockholders by the weighted average number of common shares used in the basic earnings per share calculation plus the number of common shares that would be issued assuming conversion of all potentially dilutive common shares outstanding. Below is a reconciliation of the numerators and denominators of basic and diluted earnings per share for each of the periods presented:
|
|
|
Three months ended September 30, |
|
Nine months ended September 30, |
|
||||||||
|
|
|
2003 |
|
2004 |
|
2003 |
|
2004 |
|
||||
|
Numerators |
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Numerators for basic and diluted earnings per share: |
|
|
|
|
|
|
|
|
|
||||
|
Net income (loss) |
|
$ |
82,584 |
|
$ |
134,971 |
|
$ |
(426,250 |
) |
$ |
133,572 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Denominators |
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Denominators for basic and diluted earnings per share: |
|
|
|
|
|
|
|
|
|
||||
|
Weighted average shares outstanding – basic |
|
13,358,619 |
|
13,773,219 |
|
13,358,619 |
|
13,633,611 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Dilutive potential common shares |
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Stock options (1) |
|
916,673 |
|
530,567 |
|
— |
|
530,567 |
|
||||
|
Denominator for dilutive earnings per share |
|
14,275,292 |
|
14,303,786 |
|
13,358,619 |
|
14,164,178 |
|
||||
|
Net income (loss) per common share |
|
$ |
0.01 |
|
$ |
0.01 |
|
$ |
(0.03 |
) |
$ |
0.01 |
|
|
Net income (loss) per common share – assuming dilution |
|
$ |
0.01 |
|
$ |
0.01 |
|
$ |
(0.03 |
) |
$ |
0.01 |
|
7
(1) For the three and nine months ended September 30, 2004, 1,288,004 options have not been included in dilutive shares, as the effect would be anti-dilutive. For the three and nine months ended September 30, 2003, 1,074,998 and 1,991,671 options have not been included in dilutive shares respectively, as the effect would be anti-dilutive.
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended. “Forward looking statements” are those statements that describe management’s beliefs and expectations about the future. We have identified forward-looking statements by using words such as “anticipate,” “believe,” “could,” “estimate,” “may,” “expect,” and “intend.” Although we believe these expectations are reasonable, our operations involve a number of risks and uncertainties, including those described in the “Risk Factors” section of our Annual Report on Form 10-K and other documents filed with the Securities and Exchange Commission. GlobalSCAPE’s actual results could differ materially from those discussed in any forward-looking statements included in this Quarterly Report.
Overview
GlobalSCAPE develops and distributes Internet related software including File Management, Content Management and Web Development Tools. We distribute our software primarily via download from our Internet website. During 2003 and the third quarter of 2004, approximately 66% of our revenues were generated from customers within the United States, with the remaining 34% concentrated mostly in Western Europe, Canada and Australia.
• Content Management Products – Our Content Management Products help non-technical business users update and manage Web Site content without excessive training. The product line includes PublishXML, PureCMS and SnapEdit.
• File Management Products – Our File Management products are best known for the “CuteFTP” product line. They primarily consist of products that help users move and copy files on the Internet. A substantial portion of our revenues are derived from licensing our File Management products. Some of our products encrypt the transfers for security using technology similar to a Web browser. Our File Management product line includes CuteFTP Home, Cute FTP Professional, SecureFTP Server and CuteZIP.
• Web Development Products – Our Web Development Products help Web developers create Web sites. They provide a wide range of capabilities such as creating Web sites from a template, direct editing of Web based computer code and creating Web surveys. Our Web Development product line includes CuteSITE Builder, CuteHTML, CuteMAP and Web Survey.
CuteFTP Home and CuteFTP Professional accounted for approximately 76% and 70% of total revenues in the quarters ended September 30, 2003 and 2004, respectively. Sales of these products declined approximately 9% when comparing the third quarter of 2003 to the third quarter of 2004. This decline in combined sales was due to a 34% decline in sales of CuteFTP Home. However, sales of CuteFTP Professional increased approximately 32% over the same periods. Total revenues decreased approximately 1% from the third quarter of 2003 to the third quarter of 2004, Secure Server sales increased approximately 118% over the same period and accounted for 13.6% of sales in the quarter ended September 30, 2004.
Substantially all software products ultimately reach a point in their lifecycle in which sales can be expected to plateau or decline. While it cannot be determined with certainty, CuteFTP Home and CuteFTP Professional may have reached such a point in their lifecycles. Management believes that the market for stand-alone FTP clients for home consumers may be declining. However, we have not seen the same decline in the market for secure FTP clients and servers such as CuteFTP Professional and Secure Server which we believe better target the needs of businesses.
8
Our success in 2004 is, to a great extent, dependent on our ability to market and sell our content management products effectively as well as our ability to maintain the revenues generated by CuteFTP products. We also believe that we have an opportunity to increase sales of CuteFTP Professional and Secure Server. In general, our success depends on our ability to introduce new products and the market’s acceptance of these products. We released new versions of CuteFTP Home, CuteFTP Professional and Secure Server early in 2004 and we believe we can slow the decline in sales of CuteFTP Home and improve sales of CuteFTP Professional and Secure Server. In the third quarter, GlobalSCAPE released new products CuteFTP Server and SnapEDIT, along with a new version of PureCMS.
The Company maintained a positive working capital position as of September 30, 2004 through a combination of revenue growth and expense reductions. The Company incurred significant operating losses during the last three years and in the first quarter of 2004. In February 2004 GlobalSCAPE reduced its workforce by 20%, laying off 9 of the 45 people then employed by the Company. This workforce reduction was a necessary step in improving the overall financial health of the organization.
We rely heavily on cash flows from operations and these cash flows are directly linked to CuteFTP Home and CuteFTP Professional, which accounted for 76% and 70% of our revenues in the nine months ended September 30, 2003 and 2004 respectively. Much of the decline in revenues from the sale of these two products was offset by sales of newer products in the third quarter of 2004, namely, Secure Server, CuteHTML PRO, FTP for MAC, FTP for MAC PRO and PublishXML. Total revenues decreased 1% when comparing the third quarter of 2004 to the same period in 2003.
The Company’s liquidity could be reduced in 2004 if sales of CuteFTP Home continue to decline and the Company is unable to successfully introduce new products or increase sales of existing products.
If sales continue to decline or the Company’s liquidity position otherwise requires, management has the intent and ability to substantially reduce personnel and personnel-related costs, reduce or substantially eliminate capital expenditures and/or reduce or substantially eliminate research and development expenditures.
On March 30, 2004, the Company obtained a $200,000 line of credit with the Brown and Mann-GlobalSCAPE Joint Venture. The line of credit is available after June 21, 2004 if the Company fails to extend a line of credit with a bank and matures on December 31, 2004. The interest rate is subject to change and is indexed to the prime rate published in the Wall Street Journal. In connection with the line of credit, GlobalSCAPE entered into a Commercial Security Agreement with the Brown and Mann-GlobalSCAPE Joint Venture whereby GlobalSCAPE granted a security interest in all its accounts and equipment. The company has renewed their line of credit with a bank in the amount of $250,000 and it matures on December 21, 2004, no borrowings have been made on these instruments in the third quarter of 2004. The company expects to renew only the line of credit with the bank upon maturity in December 2004.
Net cash provided by operating activities was $258,587 for the nine months ended September 30, 2004 as compared to $13,384 used in the nine months ended September 30, 2003. Cash provided in operations for the nine months ended September 30, 2004, was primarily the result of net income and depreciation and amortization, and to a lesser extent decreases in accounts receivable, accrued expenses, and deferred revenue offset by a decrease in accounts payable.
Net cash used in investing activities for the nine months ended September 30, 2003 and 2004 was $47,543 and $32,991, respectively. The net cash used in both periods was mainly for the purchase of computer hardware and software.
Net cash provided by (used in) financing activities for the nine months ended September 30, 2003 and 2004 was $54,383 and $(111,538), respectively. Net cash provided by financing activities for the period ended September 30, 2003 consisted of $45,617 in principal payments on capital lease obligations, and $100,000 borrowing on a bank line of credit. The financing activity in the nine months ended September 30, 2004 was related to $15,294 in principal payments on capital lease obligations, a $100,000 repayment of a bank loan and $3,756 in receipts related to the exercise of stock options.
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As of September 30, 2004 we had $456,491 in cash, total current assets of $724,341 and current liabilities of $469,430, resulting in working capital of $254,911, a $235,698 improvement over the working capital of $19,203 at June 30, 2004. Our principal commitments consisted of obligations outstanding under operating leases as well as royalty agreements with third parties and trade accounts payable. We plan to continue to expend significant resources on product development in future periods and may also use our cash to acquire or license technology, products or businesses related to our current business. We expect that operating expenses will continue to be a material use of our cash resources as well. The facility that we currently occupy is expected to be sufficient for our growth for the next twelve months. Consequently, we do not anticipate significant expenditures for leasehold improvements or furniture for 2004.
The following table sets forth the future minimum payments required under contractual commitments at September 30, 2004:
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|
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Payments Due by Fiscal Year |
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||||||||||||||||||
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|
|
2004 (1) |
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
Thereafter |
|
Total |
|
||||||
|
Contractual Obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Operating Lease |
|
$ |
47,665 |
|
$ |
190,659 |
|
$ |
190,659 |
|
$ |
190,659 |
|
$ |
95,330 |
|
— |
|
$ |
714,972 |
|
|
Equipment Leases |
|
1,564 |
|
6,257 |
|
6,257 |
|
3,105 |
|
— |
|
— |
|
17,183 |
|
||||||
|
Total Cash Obligations |
|
$ |
49,229 |
|
$ |
196,916 |
|
$ |
196,916 |
|
$ |
193,764 |
|
$ |
95,330 |
|
— |
|
$ |
732,155 |
|
(1) Amounts for 2004 reflect the future minimum payments for the remaining three months of the fiscal year.
Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon the Company’s financial statements, which have been prepared in accordance with accounting principles generally accepted in the Unites States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amount of assets and liabilities. On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, allowance for doubtful accounts receivable, long-lived and intangible assets, income taxes, contingencies and litigation. Management bases its estimates on historical experience, observable trends, and various other assumptions that are believed to be reasonable under the circumstances. Management uses this information to make judgments about the carrying values of assets and liabilities that are not readily apparent form other sources. Actual results may differ from the estimates under different assumptions or conditions.
Management believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its financial statements.
Revenue Recognition
Our revenue is generated primarily by licensing our software products and providing support for those products. Revenues are comprised of the gross selling price of the software, including shipping charges and the earned portion of support and maintenance agreements. The Company recognizes revenue in accordance with the American Institute of Certified Public Accountants Statement of Position (“SOP”) 97-2, Software Revenue Recognition, as modified by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions.
Revenues from the sale of software products are recognized and completely earned upon shipment or electronic delivery of the product provided that persuasive evidence of an arrangement exists, collection is probable, payment terms are fixed and determinable and no significant obligations remain.
We also sell technical support and maintenance agreements (post contract customer support “PCS”), which are sometimes bundled with the software. When vendor specific objective evidence (“VSOE”) of fair value exists for all elements in a multiple element arrangement, revenue is allocated to each element based on the relative fair value of each of the elements. VSOE of fair value is established by the price charged when the same element is sold separately. In a multiple element arrangement whereby
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VSOE of fair value of all undelivered elements exists but VSOE of fair value does not exist for one or more delivered elements, revenue is recognized using the residual method. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue, assuming collection is probable. Revenue allocated to PCS is recognized ratably over the contractual term, typically one year.
The Company began selling technical support and maintenance services for some of its software products in 2001 and had deferred recognition of approximately $11,000 in revenue at the end of that year. Deferred revenue grew to a balance of approximately $140,000 at December 31, 2003 and $171,000 at September 30, 2003 and $169,000 at September 30, 2004. The rate of growth in deferred revenue was due primarily to the rapid growth in the sale of technical support and maintenance agreements in the fourth quarter of 2002 and the first quarter of 2003. However, sales of maintenance and support contracts declined in second and third quarters of 2003 when compared to the first quarter even as total sales increased. If the level of sales of technical support and maintenance agreements remains the same or declines, the balance of deferred revenues will stabilize or decline. However, if sales grow, this balance will increase, resulting in the deferred recognition of a significant amount of revenue in future periods.
Allowance for Doubtful Accounts
We provide credit, in the normal course of business, to a number of companies and perform ongoing evaluations of our credit risk. We require no collateral from our customers and we estimate the allowance for uncollectible accounts based on our historical experience and current credit evaluations. No single customer accounted for more than 2% of revenues in 2003 or the first nine months of 2004.
Valuation of Long-Lived and Intangible Assets
The Company assesses the impairment of long-lived and intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered important which could trigger an impairment review included the following: significant underperformance relative to historical or projected future cash flows; significant changes in the manner of use of the assets or the strategy for the overall business; and significant negative industry trends. When management determines that the carrying value of long-lived and intangible assets may not be recoverable, impairment is measured based on the excess of the assets’ carrying value over the estimated fair value. No impairment was recognized in 2003 or the first nine months of 2004.
Stock-Based Compensation
The Company has adopted Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation, and elected to use the intrinsic value method in accounting for its stock option plan in accordance with Accounting Principles Board opinion No. 25, Accounting for Stock Issued to Employees and related interpretations under which compensation expense is recorded to the extent that the current market price of the underlying stock exceeds the exercise price.
During the third quarter of 2004, 105,000 options were granted to various employees at an average exercise price of $0.125 per share. During the nine months ended September 30, 2004, 284,600 options were exercised at an average price of $0.0132 per share, by employees. Additionally, 119,000 shares were foreited and grants of 366,000 options were issued.
Research and Development
Research and development expenses include all direct costs, primarily salaries for personnel and expenditures with external development sources, related to the development of new products and significant enhancements to existing products and are expensed as incurred until such time as technological feasibility is achieved. For the nine months ended September 30, 2003 and 2004, we spent approximately $648,000 and $552,000, respectively, on research and development. No research and development expenses were capitalized in either of these periods and all previously capitalized research and development expenses were fully amortized at December 31, 2002.
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Income Taxes
GlobalSCAPE accounts for income taxes using the liability method in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. The liability method provides that the deferred tax assets and liabilities are recorded based on the difference between the book and tax basis of assets and liabilities and their carrying amount for financial reporting purposes, as measured by the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets are carried on the balance sheet with the presumption that they will be realizable in future periods when pre-taxable income is generated.
Statement of Financial Accounting Standards (SFAS) No. 109 requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Based on these criteria, management has concluded that no income tax benefits are to be recorded related to the net income for the nine months ended September 30, 2004, because we cannot be certain of the future period recoverability of tax assets generated from any available net operating losses.
Revenue. For the three months ended September 30, 2003 and 2004, total revenues decreased $66,459 or 5% from $1,336,682 to $1,270,223 largely due to the $74,681 decrease in the sales of Cute FTP and CuteFTP Pro from $942,658 to $867,977 between the respective periods. Reveues from Cute FTP declined approximately 39% and CuteFTP Pro increased approximately 34%. Combined revenues from CuteFTP and CuteFTP Pro declined approximately 8% over the comparable periods and accounted for approximately 68% of total revenues for the three months ended September 30, 2004.
Cost of Revenues. Cost of revenues consists primarily of production, packaging and shipping costs for boxed copies of software products as well as a portion of our bandwidth costs, certain licensing expenses and royalties. Cost of revenues decreased $16,847 or 13% between periods from $128,404 for the three months ended September 30, 2003 to $111,556 for the three months ended September 30, 2004 due to decreased royalty expenses and an increase in outside professional services. Royalties that the Company pays on software products licensed from third parties, which it resells, are expensed as a cost of sale when the software product is sold or earlier if the recoverability of any prepaid royalties is in doubt. The Company has distribution agreements with Hannon Hill Corp., Trellix Corp., Perseus Development Corp., Beehive Software, Inc., Visicom Media, Inc., and Xnet Communications GmbH. The GlobalSCAPE software products associated with each of the companies are PureCMS / Publish XML, CuteSITE Builder, Web Survey, Mac FTP, CuteHTML Pro, and Mac FTP Pro, respectively. GlobalSCAPE’s agreement with Hannon Hill Corp. required a minimum royalty of $16,667 per month, as prepayment of royalties, for 12 months beginning in December 2002. These payments were expensed as paid because the lower than expected sales of PureCMS raised doubt as to the realization of benefit from these prepayments. The total amount expensed in 2003 relating to these prepayments was $183,337. As a result, we expect the cost of revenues to decline both as a percentage of sales and in gross terms in 2004 when compared to 2003 as we recover benefit from these minimum royalties.
Selling, General and Administrative. Selling, general and administrative expenses consist primarily of personnel and related expenses, marketing, customer support, rents, bad debt and professional fees. For the three months ended September 30, 2003 and 2004, selling, general and administrative expenses were $790,200 and $823,813, respectively, an increase of $33,613 or 4%.
Research and Development. Research and development expenses decreased $60,824 or 27% between periods, from $226,567 to $165,743. The increase was due to decreased expenditures for external development resources as well as lower personnel costs for internal staff.
Depreciation and Amortization. Depreciation and amortization expense consists of depreciation expense related to our fixed assets, amortization of the trademark associated with our purchase of CuteFTP and in prior periods, amortization of capitalized development costs. Depreciation and amortization expense decreased from $106,511 to $33,769, a decrease of 68%. This decrease was due to a reduction in depreciation expense as fixed assets come to the end of their depreciable lives as well as a slowdown in additions to fixed assets in current periods relative to prior periods.
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Other Income, Expense. For the three months ended September 30, 2003 and 2004, interest expense decreased from $1,016 to $371, respectively. The majority of interest expense incurred during these periods was related to capital leases.
Income Taxes. Although we recorded net income for the three months ended September 30, 2003 and 2004, we did not recognize a tax liability related to this net income. The amount of current tax expense generated from quarterly taxable income was offset by a reduction in the valuation allowance posted in prior periods against deferred tax assets. As discussed in our Annual Report on Form 10K, we cannot be certain of the future period recoverability of tax assets generated from available net operating losses.
Net Income (Loss). GlobalSCAPE recorded net income of $82,584 and $134,971 for the three months ended September 30, 2003 and 2004, respectively. The positive results in the third quarter 2004 were largely the result of reductions to operating costs discussed above.
Revenue. For the nine months ended September 30, 2003 and 2004, total revenues decreased $36,418 or 1% from $3,766,576 to $3,730,158. Revenues from CuteFTP Home and CuteFTP Professional declined 9% between periods. Total revenues were helped somewhat by increased sales of some of our newer products such as CuteSITE Builder, Secure Server, PureCMS, FTP for MAC, FTP for MAC PRO, CuteHTML PRO, Web Survey and PublishXML.
Cost of Revenues. Cost of revenues consists primarily of production, packaging and shipping costs for boxed copies of software products as well as a portion of our bandwidth costs, certain licensing expenses and royalties. Cost of revenues decreased $97,674 or 24% between periods from $401,475 to $304,071 for the nine months ending September 30, 2003 and 2004, respectively, due to decreased royalty expenses related to our technology licensing agreement for the PureCMS product.
Selling, General and Administrative. Selling, general and administrative expenses consist primarily of personnel and related expenses, marketing, customer support, rents, credit card transaction fees, bad debt and professional fees. For the nine months ended September 30, 2003 and 2004, selling, general and administrative expenses decreased $205,453 or 7%. The decrease is largely due to the decrease in expenditures for the PureCMS product launch in 2003 and offset by increases in sales commissions, health insurance costs, software maintenance and professional fees in 2004.
Research and Development. Research and development expenses decreased $95,182 or 15% between periods, from $647,659 to $552,477. The decrease was due to slightly lower personnel costs for internal staff and the reduction of outside development resources.
Depreciation and Amortization. Depreciation and amortization expense consists of depreciation expense related to our fixed assets, amortization of the trademark associated with our purchase of CuteFTP and in prior periods, amortization of capitalized development costs. Depreciation and amortization expense decreased from $332,848 to $139,782, a decrease of 58%. This decrease was mainly due to the purchase of CuteFTP being fully amortized as of September 30, 2003 and due to a reduction in depreciation expense as fixed assets come to the end of their depreciable lives.
Other Income, Expense. For the nine months ended September 30, 2003 and 2004, interest expense decreased from $3,071 to $1,091, respectively. The majority of interest expense incurred during these periods was related to capital leases. During the nine months ended September 30, 2003, we recognized a loss on the disposal of fixed assets in the amount of $1,486.
Income Taxes. We recognized no benefit related to the net income in the first nine months of 2003 because we cannot be certain of the future period recoverability of tax assets generated from available net operating losses. The provision for state income taxes in 2003 was $1,400 and no provision for federal income taxes in 2003.
Although we recorded net income for the nine months ended September 30, 2004, we did not recognize a tax liability related to this net income. The amount of current tax expense generated for the nine
13
months ending September 30, 2004 was offset by a reduction in the valuation allowance posted in prior periods against deferred tax assets. As discussed in our Annual Report on Form 10K, we cannot be certain of the future period recoverability of tax assets generated from available net operating losses.
Net Income (Loss). GlobalSCAPE incurred a net loss of $426,250 and net income of $133,573 for the nine months ended September 30, 2003 and 2004, respectively. The net loss in the nine months ended September 30, 2003 was due to the approximately $460,000 in product launch expenses in the first quarter of 2003. The net income in the nine months ended September 30, 2004 was largely due to the layoff of 9 people in February 2004, lower depreciation and amortization expense and the result of expense cuts in the first quarter of 2004 and realized in the second and third quarters of 2004. The net income for the nine months ended September 30, 2004 is an improvement of approximately $558,423 over the same period in 2003.
Increases in inflation generally result in higher interest rates and operating costs. Our greatest exposure is to the cost of salaries and general and administrative expenses. To date we believe that inflation has not had a significant impact on our operations.
We believe our sales are subject to seasonal variations. We experience significantly less sales volume during national holidays and weekends when compared to normal business days. We expect that in future periods we will see weakness in the fourth quarter when compared to the third quarter due to the holiday season.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
To date, we have not utilized derivative financial instruments or derivative commodity instruments. We do not expect to employ these or other strategies to hedge market risk in the foreseeable future. We may invest our cash in money market funds, which are subject to minimal credit and market risk. We believe that the interest rate risk and other relevant market risks associated with these financial instruments are immaterial.
In the nine months ended September 30, 2004, approximately 34% of our revenues came from customers outside the United States. All revenues are received in U.S. dollars so we have no exchange rate risk with regard to the sale. However, as of July 1, 2003, the European Union (EU) enacted Value Added Taxes (VAT) on electronic purchases. These taxes are charged to our non-business customers in the EU and, in our case, are remitted quarterly in pound sterling. We expect that the impact of this currency translation will not be material to our business.
a) Evaluation of disclosure controls and procedures. Within the 90 days prior to the filing date of this report, our President and Chief Financial Officer carried out an evaluation of GlobalSCAPE’s disclosure controls and procedures (as defined SEC Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”)) and concluded that the controls and procedures are effective in recording, processing, summarizing and reporting the information required to be disclosed by GlobalSCAPE in the reports it files with the SEC under the Exchange Act within the time periods specified in the SEC’s rules and forms.
b) Changes in internal controls. There were no material changes in GlobalSCAPE’s internal controls subsequent to the evaluation described above.
We are not currently involved in any material legal proceedings.
14
None in the third quarter of 2004.
Not applicable.
None in the third quarter of 2004.
Stefan Lagmark was named Vice President of Sales and Marketing effective August 16, 2004 replacing Jeffrey Gehring who served as Vice President of Sales until July 30, 2004.
(a) Exhibits
31.1 Certificate pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certificate pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certificate pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
A Form 8-K was filed on September 21, 2004, under Item 4.01, relating to a Change in Accountants on September 16, 2004.
15
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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GLOBALSCAPE, INC. |
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November 12, 2004 |
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By: |
/s/ Charles R. Poole |
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Date |
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Charles R. Poole |
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President and Chief Operating Officer |
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November 12, 2004 |
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By: |
/s/ Thomas F. Farar |
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Date |
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Thomas F. Farar |
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Chief Financial Officer |
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